Saturday, Oct 10, 2009

Gold warning

Reuters: Gold Q3 ETF inflows dwindle, investors switch

Gold isn't flowing into ETFs (holding fund, you put money in and they hold gold, more money in, more gold in) anymore, and you could infer from this article that the tide is literally on the turn. According to ftalphaville(link in a comment), courtesy of Bedlam Asset management, quite a few ETFs generally have used leverage to generate stronger returns, and should one of them pop when prices go against them, the lack of transparency in ETFs generally will lead to a run, which will in turn lead to a large amount of whatever commodity the ETF deals with flooding onto the market tsunami style. So if you are a deflationista wondering why gold hasn't collapsed (i.e. why you are wrong), then look in the news for an ETF failure as price collapse trigger, or deleveraging induced deflation.

Posted by stillthinking @ 06:09 PM (2391 views)
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1. stillthinking said...

http://ftalphaville.ft.com/2009/10/06/75796/how-etfs-are-like-mortgage-backed-securities/

This is the same subject basically so no point posting in the main bit. Actually it suggest ETFs are as flaky and unreliable like the securitised mortgage market. So although this is relevant in particular to gold, the article suggests reasonably enough that this effect will ripple through to all commodities. Which is a big deflationary SMACK.

Ironically of course, the reason why all these funds flowed into gold commodities in the first place was for safety and possibly to hedge against inflation, but by virtue of moving into ETFs they contributed to a not-safe deflationary environment.

It should also be remembered that although holding physical gold does indeed protect you from counterparty risk, and the various shennanigans of the paper market, but holding physical gold does NOT protect from a swift drop in the market value.

Saturday, October 10, 2009 06:17PM Report Comment
 

2. jackas said...

Sorry, but I don't agree that ETFs lack transparency.

They are public listed companies - you can see what they hold...it's public information. All the large ETFs are non-leveraged, and every share is backed by a gold deposit - that's how a share gets created - the investor effectively transfers the correct amount of gold to the ETF.

There is no real comparison to the sub-prime securitisation that went on. Granted there could be a collapse in the gold price which would cause people to maybe sells ETFs to reduce exposure - but that would be for fundamental reasons (of which there are none - unless you see Bernanke and his mates getting a brain transplant any time soon) rather than because of a revelation of a large whole in the value of the ETF market.

How much of the market value of the gold-based ETFs is not backed by physical gold? would be surprised if it is more than negligible.

Monday, October 12, 2009 12:18AM Report Comment
 

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